The document discusses several recent court cases regarding payment provisions in construction contracts under the Local Government, Economic Development and Construction Act 2009. The cases have clarified that if a party fails to issue payment or pay less notices, the other party can issue their own notice claiming the amount due. However, more recent cases have found that for a notice to be valid and enforceable, it must meet strict requirements regarding form, substance, and intent, and be issued in accordance with the contract. If these requirements are not met, failure to issue contrary notices does not automatically entitle the claiming party to payment.

1. Date posted: 17 February 2017
INTRODUCTION
1. In the last few years there have been a number of cases regarding the interpretation of
payment provisions in the Local Government, Economic Development and Construction Act
2009 (the “Construction Act”) which are now incorporated into most standard forms of
construction contract.
PAYMENT NOTICES
2. The new regime is similar to the previous one (from May 1998 to 2009), in that a
party due to make payment (the “Payer”) still has to issue a payment notice not later than
five days after the due date.
1. However, whereas previously there was no real detriment or sanction to the Payer if it
failed to issue this notice, now if the deadline for issuing the Notice passes and a Payment
Notice is not issued, the party due to receive payment (the “Payee”) may give the Payer a
Payment Notice – known as a “Payee's Notice in Default”. This notice can be issued at any
time, by the Payee, after the date that the Payment Notice was to be issued.
2. This Payee Notice in Default should state the amount considered due and the basis of
this calculation and this becomes the sum due.
PAY LESS NOTICES
1. The 2009 Act places an obligation on the Payer to pay the “notified sum”. If
deductions are to be made against the notified sum, the Payer is required to issue a “Pay
Less Notice” before the final date for payment. This Pay Less Notice must specify the sum
that the Payer considers to be due on the date the notice is served to the Payee and the
basis on which that this sum has been calculated.
2. This notice must be given not later than the prescribed period before the final date for
payment, specified in the Contract or the Scheme.
CASES
1. Unsurprisingly, the crucial importance of payment in the construction industry,
coupled with
what some see as draconian consequences for failing to issue the correct notice, has
generated a number of significant cases which have explained and/or clarified the
interpretation of the Act and the Scheme and/or the standard forms of contract.
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2. 8. These cases include: ISG Construction Ltd. v Seevic College, Leeds City Council v Waco UK
Ltd., Galliford Try Building Ltd. v Estura Ltd., Henia Investments Inc. v Beck Interiors Ltd.,
Caledonian Modular Ltd. v Mar City Developments Ltd., Harding v Paice, Jawaby Property
Investment Ltd. v The Interiors Group Ltd., Kilker Projects v Rob Purton, Surrey and Sussex
Healthcare NHS Trust v Logan Construction (South East) Ltd. and Kersfield Developments
(Bridge Road) Ltd. v Bray and Slaughter Ltd.
FORM, SUBSTANCE AND INTENT
9. Drawing together the substance of these cases brings to light a number of broad
principles, which anyone involved in applying or making payment under a construction
contract should be aware of.
1. Many of these cases are centred around the question of what happens when no
Payment and Pay Less Notice is issued.
2. The ISG and Galliford Try cases clarified that, in the absence of such notices, the
Payee may issue an Interim Payment Notice or, alternatively, rely on the sum claimed in
properly issued valid Applications for Payment. The Payee will be entitled to the sum
detailed in its Application/Notice.
3. It does, however, seem there was a realisation that this element of the Act/Contract
was potentially open to abuse by a “crafty” Payee, especially when dealing with an
inexperienced or naïve Payer. This resulted in many what are often referred to as “smash
and grab” adjudications.
4. In the six to seven months leading up to 2016, there were several cases regarding
this issue and the courts seem to have attempted to re-balance this position. Caledonia,
Henia and Severfield all elaborated on what would constitute a valid Application/Notice and
detailed the effect of such a document not being prepared and issued strictly in accordance
with the Contract.
5. In Henia, it was decided that an Application for Payment that was six days late was
not a valid Application under the Contract and, as such, the absence of a Payment Notice
and/or a Pay Less Notice was immaterial.
6. It should also be noted that the Judge also said that, if the Application for Payment
had been issued on time, a Payment Certificate issued by the Payer (which was in effect
three minutes late) would also have been viewed as invalid and the Payee would have been
entitled to the sums claimed.
7. Coulson J., in his Judgement on Caledonia, stated with regard to the principle that, in
the absence of a valid Payment Notice and/or Pay Less Notice, the Payee is entitled to the
sum detailed in a valid Application for Payment/Interim Payment Notice, that “...if
contractors” (Payee’s) “...want the benefit of these provisions, they are obliged, in
return, to set out their interim payment claims with proper clarity. If the employer
is to be put at risk that a failure to serve a payless notice at the appropriate time
during the payment period will render him liable in full for the amount claimed, he
must be given reasonable notice that the payment period has been triggered in the
first place”.
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3. 17. This was further confirmed in Coulson J.’s later Judgement in the Severfield case.
1. After this veritable flurry of cases, a further case was decided early in 2016. This case
- Jawaby Property Investment Ltd. v The Interiors Group Ltd. - confirmed and elaborated on
the Court’s view on what was required of an Application for Payment/Interim Payment
Notice to make it valid and therefore enforceable.
2. The Hon. Mrs Justice Carr stated that, to decide whether an Application for Payment/
Interim Payment Notice was indeed valid and enforceable, an assessment must be made as
to whether the Notice is clear in “Form”, “Substance” and “Intent”. This principle has been
applied to more recent cases, including Surrey and Sussex Healthcare NHS Trust v Logan
Construction (South East) Ltd. and Kersfield Developments (Bridge Road) Ltd. v Bray and
Slaughter Ltd.
3. Broadly, for an Application/Notice to be deemed valid, it must be on time (i.e. it must
be issued at the time required and not a minute later), it must be clear that the Application/
Notice is a Notice requiring action by the Payer, it must be prepared in sufficient detail to
allow the Payer to understand the claim (in accordance with the Contract or if no contract
exists to a reasonable standard), all stated dates must be correct and it must be in
accordance with the Contract.
SUMMARY
1. Quite simply, all the i’s should be dotted and all the t’s crossed. The Court’s view is
that the
obligation on the Payer to pay sums applied for by the Payee in the absence of a contrary
Payment and Pay Less Notice is so draconian that the Application/Notice must be strictly in
accordance with the Contract and that any flaw should prevent the Application/Notice from
being enforceable.
2. In our view, to assume that a failure by the Payer to issue a Payment/Pay
Less Notice automatically entitles the Payee to sums detailed in an
Application/Notice would be wrong. You must ensure that the Application/Notice is
prepared and issued strictly in accordance with the Contract.
AND FINALLY,
1. Some other noteworthy points addressed in the string of cases are:
. Final Accounts and Termination Accounts will be viewed and treated
differently.
. Erroneous claims included in an Application/Notice will not invalidate the
Application/Notice if it is, to all other intents and purposes, in accordance
with the Contract.
. In most cases concerning interim payments, a Payer will not be able to
commence a second Adjudication on the “true” value of the application.
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4. A Pay Less Notice can incorporate an entire revaluation of the Contract; it is
not simply a document detailing deductions from a previous Payment
Certificate/Notice. This does raise the question as whether a Payment
Notice is truly required and we shall review and consider this in a
future article.
ARTICLE BY: NICK CHEETHAM (BSc (Hons), MRICS)
(nick.cheetham@ramskillmartin.co.uk or 07753 837149)
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